ONE of the more prevalent features of growth is the movement of labor from agriculture to other sectors, such as manufacturing and services. In the more advanced economies, this transformation can be attributed to two factors.
First, agricultural products are believed to be nonresponsive to price and income changes at a certain high level of income, hence resulting to a lower share in the country’s total output, as the economy grows. Workers are then expected to transfer to the growing sectors. Second, since land is fixed but is predominant in agriculture, labor absorption in this sector was limited, resulting in lower employment share in the face of increased population. These two factors will make it efficient for labor to move away from agriculture.
Efficiency would then be seen in the emergence of off-farm activities in rural areas. Previously, most people had thought that rural off-farm employment is a low productivity sector producing low-quality goods, expected to wither away as a country develops and incomes rise. A corollary of this perspective is that the government need not devote resources to promoting the sector, nor be concerned about negative repercussions on the rural non-farm sector arising from government policies directed at other objectives.
However, recent studies argue for paying greater attention to the non-farm sector mainly because of the sector’s perceived potential in absorbing a growing rural labor force, in slowing rural–urban migration, in contributing to national income growth and in promoting a more equitable distribution of income. In fact, depending on their ability to link with other industries, rural non-farm firms can be more productive than urban firms.
The expansion of the rural non-farm sector nevertheless hinges on agricultural development for three main reasons. First, the labor productivity in agriculture, measured in terms of output per worker, has increased to the extent that laborers may now be released to other sectors without reducing its overall production. In this case, those remaining in agriculture are able to produce more presumably because of access to technology and human capital. Second, assuming that there is agricultural growth, the savings generated from farm activities will be large enough to create new activities, which may or may not be related to agriculture. Third, increased agricultural productivity creates a demand for non-farm products because of subsequent increases in incomes. Thus, the crucial element is high agricultural labor productivity, leading to savings and incomes and the movement of labor away from agriculture forms part and parcel of the country’s structural transformation.
Unfortunately, the case of the Philippines is different to this ideal scenario. It is true the share of the agricultural sector to total output has declined from 14 percent in 2011 to 10 percent in 2013 due to various reasons including the overall increase in economic growth. And, for the same period, the share of agriculture to total employment, indeed, decreased from 37 percent to 30 percent.
However, the problem is in agricultural productivity. The figure below shows my calculations of labor productivity for all sectors in terms of real value of output per worker. Note that labor productivity in agriculture remained largely constant and significantly lower than the other sectors.
The observed decline in employment share combined with the low agricultural labor productivity is detrimental to the economy for a number of reasons. First, because agricultural productivity is low, the current economic growth, due in part to the rise of the manufacturing sector, cannot be considered inclusive. Manufacturing growth, while presumably providing benefits to the poor, may not be particularly progressive in terms of its distributional effects. Rural non-farm production, however, given low capital and land requirements, could be potentially more accessible to the poor than the manufacturing activities found mostly in more industrialized areas of the country.
Second, people, indeed, move out of agriculture toward rural off-farm activities. However, because households lack savings, they do not engage in modern, capital intensive types of technologies, such metal-working or machinery repair shops, activities that have forward linkages with the other sectors in the economy. Instead, they are involved in less productive sorts of activities, such as retail and traditional forms businesses, such as household rice-milling, which may eventually be crowded in the process of market integration. In the end, such activities may not be sustainable.
Third, having no other options to raise incomes from agriculture, household members may opt to migrate to other countries. Indeed, while these members may not necessarily have reached higher levels of education, the members are highly motivated individuals, willing to take risks in outside the country. Those remaining in the farms and rural areas are often the less motivated and less productive members of the households, leading to lower wages in the rural areas. Because of this, despite the substantial remittances, migration can have significant opportunity costs.
The main point is that, even as the country revives its manufacturing sector and aims for higher growth rates, it cannot afford to ignore its agricultural sector. Without raising agricultural productivity, much of its efforts in achieving high growth rates will be unsustainable and, more important, non-inclusive.
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Leonardo Lanzona Jr. is director of the Ateneo Center for Economic Research and Development and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.